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Difficulty: HardAdjustments for Depreciation of Fixed Assets

The following balances were extracted from the ledger of a sole trader as at 31st December 2025:
- Plant and Machinery (cost): ₦1,200,000\text{₦}1,200,000
- Accumulated Depreciation on Plant and Machinery: ₦300,000\text{₦}300,000

Additional Information:
On 1st July 2025, an additional machine costing ₦400,000\text{₦}400,000 was purchased on credit and mistakenly debited to the Purchases Account. Depreciation is to be provided at 20%20\% per annum using the reducing balance method.

What is the total depreciation charge for plant and machinery to be debited to the Profit and Loss Account for the year ended 31st December 2025?

  1. ₦220,000\text{₦}220,000Answer
  2. B
    ₦180,000\text{₦}180,000
  3. C
    ₦260,000\text{₦}260,000
  4. D
    ₦280,000\text{₦}280,000

Answer

The total depreciation charge to be debited to the Profit and Loss Account is ₦220,000\text{₦}220,000.
The correct answer accounts for both the existing asset depreciated on its net book value (₦1,200,000−₦300,000=₦900,000×20%=₦180,000\text{₦}1,200,000 - \text{₦}300,000 = \text{₦}900,000 \times 20\% = \text{₦}180,000) and the newly purchased machine debited to machinery account and depreciated for 6 months (₦400,000×20%×612=₦40,000\text{₦}400,000 \times 20\% \times \frac{6}{12} = \text{₦}40,000), yielding a total depreciation of ₦220,000\text{₦}220,000.

Step-by-Step Solution

1
Adjust plant and machinery cost for misclassified capital expenditure
Unrecorded plant and machinery addition = ₦400,000\text{₦}400,000, acquired on 1st July 2025.
Purchases of fixed assets must be capitalized in the fixed asset account rather than charged to the Purchases Account.
2
Calculate Net Book Value (NBV) and depreciation for existing machinery
NBV = ₦1,200,000−₦300,000=₦900,000\text{₦}1,200,000 - \text{₦}300,000 = \text{₦}900,000. Depreciation = 20%×₦900,000=₦180,00020\% \times \text{₦}900,000 = \text{₦}180,000.
Under the reducing balance method, annual depreciation is calculated on the Net Book Value at the beginning of the financial period.
3
Calculate pro-rata depreciation for newly acquired machinery
Depreciation = 20%×₦400,000×612=₦40,00020\% \times \text{₦}400,000 \times \frac{6}{12} = \text{₦}40,000.
Assets acquired during the accounting period are depreciated from the date of acquisition to the financial year-end (6 months from July 1 to December 31).
4
Sum up the total depreciation charge for the year
Total depreciation = ₦180,000+₦40,000=₦220,000\text{₦}180,000 + \text{₦}40,000 = \text{₦}220,000.
The total depreciation expense for all machinery held during the year is debited to the Profit and Loss Account.

Key Concept

Adjustments for depreciation on reducing balance method with mid-year asset acquisition and capital expenditure correction
Estimated Time:2m 0s
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Topics

Adjustments for Depreciation of Fixed Assets

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